- GBP/JPY gains ground as the UK key economic data loom this week.
- BoE policymaker Catherine Mann expressed that UK wage growth remains a concern for inflation.
- The upside of the GBP/JPY cross could be limited due to safe-haven flows amid increased Middle East tensions.
GBP/JPY edges higher to near 187.90 during the European session, following thin trading as the Japanese market observed Mountain Day on Monday. Traders are now awaiting the release of monthly UK employment data on Tuesday, followed by consumer inflation figures on Wednesday. These economic reports could offer new insights into the UK’s economic conditions, which may influence the Bank of England’s monetary policy outlook.
On Monday, Bank of England (BoE) policymaker Catherine Mann expressed concerns in a podcast with the Financial Times (FT) about UK wage growth, noting it remains a key issue for inflation. Despite the main rate holding steady at the BoE’s 2% target in June, Mann continues to worry about potential upward pressures on inflation.
The upside potential for the GBP/JPY cross might be constrained as Japan’s monetary policy outlook indicates that the Bank of Japan (BoJ) officials are prepared to raise rates further. However, they have adopted a more cautious stance due to the heightened market volatility observed last week.
Additionally, the GBP/JPY cross may face challenges due to safe-haven flows amid increased geopolitical tensions in the Middle East. ABC News reported that the Israel Defense Forces (IDF) intercepted around 30 “projectiles” crossing from Lebanon into northern Israel early Monday. Additionally, Reuters cited Gaza Civil Emergency Service on Saturday, the Israeli incursion into Gaza escalated with an airstrike targeting a school compound, leading to at least 90 fatalities.
Inflation FAQs
Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.
The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.
Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.
Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.